BOO! PwC frightened away: Auditor abandons Boohoo to prevent reputational damage
November 1, 2020
2 min read
What's going on here?
Boohoo announces that PricewaterhouseCoopers (PwC) will not seek reappointment as the company’s auditor.
What does this mean?
Boohoo, a fast fashion retailer, has performed relatively well during the pandemic with profits rising by 45% to £816.5 million in the six months to August 2020. However, on Tuesday 20 October, £775 million was wiped off Boohoo’s stock market value after news emerged that PwC would be standing down as the company’s auditor. Boohoo made a formal statement that “PwC has not resigned as auditor to Boohoo, but a process has recently commenced to tender for a new provider of audit services.”
During summer 2020, investigations by The Sunday Times and The Guardian revealed that employees in the company’s supply chain were paid below minimum wage and workplace safety was below legal standards. This played a significant role in PwC’s decision to walk away from Boohoo amid reputational concerns. PwC had held the role of auditor for Boohoo since 2014.
What's the big picture effect?
This is yet another example in the wider trend of the big accountancy companies removing less profitable or risky clients in response to increased financial penalties as a result of regulatory scrutiny. Just this week, Deloitte resigned as auditor of EG group, a petrol station empire, amid concerns over corporate governance. Moreover, Deloitte, KPMG, BDO and Grant Thornton, four of the five largest accountancy firms, have all rejected carrying out Boohoo’s auditing moving forward.
The firms that carry out audits are increasingly caught between a rock and a hard place. If they identify financial inconsistencies and publish a warning, they risk initiating a sell off by investors in the market who do not want to suffer potential losses. This may result in accusations that the auditors rushed their conclusions and subsequently facilitated the collapse of the company. Moreover, they risk losing future consultancy and auditing work if they do not sign off on the financials. However, increasing legal and financial penalties in the wake of several auditing failures – most notably, Wirecard – means that signing off on inconsistent financials is extremely risky. Despite receiving above 94% shareholder approval to audit for Boohoo just three months ago, PwC’s decision to walk away reflects a sentiment that it is not worth the risk.
This has also sparked further conversations surrounding the practice of auditing in general. The larger and more complex companies become, the more difficult it is to effectively audit. Indeed, the fact that Boohoo has been held responsible for the failures of its suppliers has further complicated the process. This also has broader implications for the extent to which companies should be expected to police their suppliers. This is currently a statutory duty however in practice it is more difficult to accomplish. Ultimately, this reinforces the importance of careful due diligence – a task carried out by law firms – in verifying that there are no hidden problems across the supply chain.
Report written by Andri Boda
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